A major overhaul of the federal student loan system that drops a private lending option will have little impact at the University of Illinois, but one area community college is preparing for change.
Congress on Thursday eliminated the Family Federal Educational Loan program, also known as Stafford loans, in which banks and other lenders get subsidies from the federal government to loan money to low- and middle-income college students. The measure will shift all funding to the Direct Loan program, which lends money from the Department of Education directly to students. The change will affect federal loans issued July 1 or later, but not existing loans.
The House passed the measure 220-207 as part of an expedited bill that also fixed provisions in the new health care law. Earlier Thursday, the Senate passed the bill 56-43.
Eliminating the government-backed private loans is expected to save $60 billion over 10 years, and that money will be used to increase Pell grants to needy students, improve funding for community colleges and historically black colleges, and ease repayment terms for students burdened by debt.
That's good news to Dan Mann, director of financial aid at the UI, a proponent of Direct Loans. The UI helped draft the Direct Loan program in the early 1990s and has used it exclusively for years, arguing it's more efficient and better for students than the private option.
"Our students are not going to see any change" as a result of the legislation, Mann said this week.
And anything that increases Pell grants is a plus, Mann and other college officials said. The plan provides modest cost-of-living increases for Pell grants, which had lost purchasing power in recent years as tuition and fees rose and grants remained stagnant. The maximum Pell grant will rise to $5,500 next year.
Danville Area Community College uses the Family Federal Educational Loan program, but it's been preparing for the July 1 changeover to Direct Loans for months, President Alice Jacobs said.
"We've known that this was likely to happen," she said. "We'll be ready for it."
It may be more labor-intensive for the college's four-person financial aid office to process Direct Loans, she said, so there could be staffing implications. But "I don't expect that to be a significant problem," she said.
That may have been a factor in the college's decision not to switch to Direct Loans before now, Jacobs said.
Financial aid is big business at the UI and other schools. More than 17,000 students at the university – about 43 percent of undergraduates and 24 percent of graduate and professional students – took out $210 million in government and/or private loans in 2008-09, according to UI figures. And 4,852 UI undergraduates received Pell grants worth $16.6 million, Mann said.
Student lending giant Sallie Mae and large financial institutions such as Citigroup, JPMorgan Chase and Bank of America stand to lose billions in student-loan business. They lobbied heavily against the bill, arguing that making the government the sole student lender will cost thousands of jobs and eliminate competition and choice for students.
Sallie Mae issued a statement this week saying it would have to cut 2,500 jobs as a result, out of a work force of 8,600. The student loan changes "intentionally eliminate private-sector jobs at a time when our country can least afford to lose them," said Vice President Martha Holler.
Republicans see it as a pattern of government takeovers, following health care reform and government bailouts of the financial and auto industries. Democrats say the private lending program amounts to corporate welfare.
Under the Family Federal Educational Loan program, the government guarantees the bank loans in the event of default and subsidizes private lenders when necessary to keep rates low.
"The federal government was paying huge subsidies for the lenders to be part of the FFEL program," Mann said. "And these were very low-risk loans for the private market."
In the past few years, the government bought up many of those loans because lenders needed to sell them to raise capital, Mann noted.
The nonpartisan Congressional Budget Office found that Direct Loans are cheaper for the government and students than the Stafford loan program, he said. "It works very well. It is run efficiently," Mann said. "A lot of these fears are unfounded."
Parkland College has used only Direct Loans since the mid-1990s, said Tim Wendt, director of financial aid and veteran services. About 2,000 students borrowed $9 million in Direct Loans this year, up from $8 million a year ago.
"Going through the banks was a pretty unwieldy process back then. Each bank had its own policies. It was bad for students," Wendt said.
Customer service was spotty, and students often had to wait longer for loans, Wendt said. Banks have improved services since then, he said, but "this is just more streamlined. You cut out the middleman."
And no matter when or where students take out Direct Loans, they still just have to deal with one lender, Mann added.
Banks are still free to offer private market-rate loans to students, Mann said. But without government subsidies they tend to carry higher interest rates – into the double digits depending on credit risk – and more students report being denied, he said.
Under both the Direct Loan and the Stafford loan programs, the interest rate is 5.6 percent for students who show financial need, which will drop to 4.5 percent in July, Mann said. The rate for other students will stay at 6.8 percent.
The loans are open to any college student regardless of income who is a U.S. citizen, is enrolled at least half-time, hasn't defaulted on a previous loan and meets other eligibility criteria, Mann said.